Do Washington & Colorado Models Work?

Costs of Tax & Regulation in Washington & Colorado

Not everyone believes that a marijuana tax will be able to drastically improve a state’s finances. “This is not a cash cow that can solve anyone’s fiscal problems,” Jeffrey Miron, a Harvard economics professor and a pro-legalization speaker at the Cato Institute, told Politico. “There is a lot of exaggeration about how big the revenue can be.”

State agency costs are estimated to be $62,972,000 over five fiscal years to implement licensing, regulation and taxation of marijuana and to implement the programs and services supported by the Dedicated Marijuana Fund. Costs by agency are as follows:

LCB will incur costs estimated at $13,590,000 for rulemaking, licensure and enforcement of the initiative.

The Department of Agriculture will incur a one-time cost of $26,000 to assist LCB in developing testing laboratory accreditation standards.

The Washington State Patrol will incur costs estimated at $28,000 to conduct background checks for LCB license applicants.

The Office of Administrative Hearings will incur costs estimated at $40,000 for appeals of LCB licensing denial, suspension and revocation actions.

The Office of the Attorney General will incur costs estimated at $318,000 to provide legal services for advice to LCB.

The Department of Revenue will incur costs estimated at $90,000 to administer tax collection programs from those licensed under the initiative.

The Health Care Authority will incur costs estimated at $38,839,000, assuming that funds deposited into the Basic Health Plan Trust Account will be used to implement a program similar to the subsidized Basic Health Plan with increased eligibility to enroll.

The Department of Social and Health Services and Department of Health will incur costs estimated at $10,041,000 to implement the programs and services funded through the Dedicated Marijuana Fund.

The University of Washington and Washington State University will have costs related to the public education and research grants from the Dedicated Marijuana Fund. Because the scope of these tasks cannot be fully determined, costs to the institutions are indeterminate, but non-zero.

To the extent the federal government chooses to pursue criminal charges against state employees for the permitting, regulation or revenue collection aspects of the initiative, the state may incur additional costs for the defense of the employee for acts performed within the scope of employment (See RCW 10.01.150). Because it is not known what actions the federal criminal law enforcement agencies may take, this cost is indeterminate.

The Washington State Patrol will incur costs estimated at $2,118,000 for additional training to employees on marijuana impairment. County and city law enforcement agencies may also require additional training to employees on marijuana impairment, but the cost is indeterminate because the type of training and number of employees trained will be determined at the local level.

The Washington State Patrol Toxicology Laboratory will incur costs estimated at $125,000 for blood testing for driving under the influence cases.

The Department of Licensing will incur costs estimated at $423,000 to administratively suspend or revoke driver’s licenses for driving under the influence.

The Office of the Attorney General will incur costs estimated at $85,000 for defending judicial appeals of DOL driving under the influence decisions.

The Administrative Office of the Courts will incur a one-time cost of $3,000 for information technology changes to the Judicial Information System.

The initiative’s provisions related to driving under the influence of marijuana, which are not affected by federal criminal law enforcement, are estimated to generate known state fee revenue of $4,295,000 and known state agency costs of $2,754,000 over five fiscal years.

The Tax & Regulate Models being promoted by MPP are based on Colorado’s Tracked Seed-to-Sale Regulatory System

In July 2011, the state Medical Marijuana Enforcement Division signed a $636,000 contract with a Florida company to build the system using Radio Frequency Identification, or RFID, technology.

About nine months later, the project was shelved because of a budget shortfall — just one unfulfilled promise in a regulatory system often held up as a national model and serving as the foundation for how the state will regulate recreational pot legalized by Amendment 64 last fall.

The challenges of starting an agency from scratch, a lack of stable funding, staff cutbacks and balancing public safety concerns with the desires of an industry looking for legitimacy all have complicated efforts to regulate Colorado’s Green Rush.

“The expectations were too high,” said Marco Vasquez, who retired this month as the division’s enforcement chief. “We had a champagne wish list on a beer budget, and we were never going to get there.”

Three years after legislation established a strict system for regulating a commodity that remains illegal under federal law, businesses are expected to follow the rules, but a thinned group of regulators lacks many of the tools to enforce them.

Technology allowing regulators to connect to the Internet and monitor businesses’ surveillance cameras around-the-clock never materialized, independent testing of products allowed by state statute has yet to happen, and a team of auditors that was to sift data and identify potential problem businesses was disbanded.

In 2010, longtime Department of Revenue enforcement official Matt Cook set about to craft legislation and a rule book governing the industry. Cook borrowed from laws regulating horse racing, casinos, alcohol — even card-dealing.

“There were 1,100 businesses out there unregulated,” Cook said. “There was no oversight, no regulation. No one really knew what to do.”

The resulting playbook pleased neither law enforcement officers, who see no benefit to legalizing marijuana for any use, nor medical marijuana entrepreneurs, who thought the cost and difficulty of following the rules would run the industry into the ground.

Required were costly fees, criminal background checks to weed out convicted felons, proof of Colorado residency and years of financial statements. Business owners would need to send the state shipping manifests and blanket their operations with surveillance cameras.

The newly minted Medical Marijuana Enforcement Division set up shop in offices at a greyhound racing park in Commerce City.

Over one summer weekend in 2010, the office took in more than $8 million in application fees, almost all of it cash, said Vasquez, the division’s former enforcement chief.

“From Day 1, we were drinking out of a firehose,” said Vasquez, a former Denver Police deputy chief and Sheridan police chief.

Field investigators started off meeting with about 90 businesses that had failed to show they were growing 70 percent of the marijuana they sold — a mandate meant to better account for pot in the system.

The vetting of license applications was supposed to take a year but dragged on “because so many in the industry who had applied had issues with their background — back taxes, improper paperwork,” said Paul Schmidt, a former division deputy director, also in enforcement. “Boy, wouldn’t you think that is strange? Actually, no, not at all. This was something that was illegal last week and legal this week.”

Even before the division’s staff was reduced, “we would have needed more people than we had,” Schmidt said.

In 2010, state legislators placed a moratorium on new business applications so the division could catch up on processing other applicants who were already in business but not yet approved. The moratorium was extended in 2011. As a result, the division was forced to stretch operating expenses budgeted for one year over two.

The division shuttered its three satellite offices and began layoffs last April that slashed its staff from 37 to 15. The number of field enforcement officers fell from 14 to six. Under statute, the division originally was supposed to have 80 employees.

The audit section — which was leading the radio-tracking system implementation— was eliminated. Vasquez said auditors were to pore over data, including patient lists businesses provided monthly, to identify potential problems in need of more attention.

“We have been behind from the beginning because we had a very steep timeline,” said division spokeswoman Julie Postlethwait. “The budget shortfall and the staff cuts were a big blow across the board.”

All the work to make the high-tech checks a reality — the radio tracking and monitoring of surveillance cameras — came to halt.

Vasquez said there “really isn’t” a seed-to-sale monitoring system in Colorado. Medical marijuana businesses are still required to tag and track their products, and state officials can still inspect those businesses, but with far fewer bodies and no high-tech tools.

Vasquez said the cuts meant fewer random compliance checks or undercover operations to prevent medical marijuana going to nonpatients. The division couldn’t take advantage of training it received on sniffing out money-laundering and organized crime, either, he said.

“I envisioned more complex investigations and going after people in the criminal element of the business and locking them up,” he said.

Vasquez said the gutted division still made an impact — including conducting inspections that caused some businesses to withdraw applications because they were so far out of compliance.

…This is the same agency that the Amendment 64 task force wants to entrust with regulation of the recreational market. Some state legislators are skeptical. “If they couldn’t handle the little piece they have now,” says Rep. Brian DelGrosso (R-Loveland) “there’s no way we can trust them to handle more.” But The Denver Post reports that supporters of the current system are undeterred:

Michael Elliott, executive director of the Medical Marijuana Industry Group, said the state’s regulation works but needs funding. Although the state might lack oversight, he said, “the vast majority of business owners are staying in strict compliance with state law.”

I don’t know if that’s true or not, and it really doesn’t matter to me whether the current marijuana businesses are complying with the state’s arbitrary rules. But Elliott and other advocates of strict control have sold those rules as the key to preventing massive diversion of marijuana to other states, which they warn would provoke a federal crackdown. It may well be the case that the appearance of careful, comprehensive regulation has helped keep the feds out, and it may also have reassured some of the voters who supported Amendment 64. But we should not confuse appearances with reality.

“There are folks in this industry [who] are interested in maintaining that status quo,” says Harris, who as head of the MMED should know a thing or two about the reality of marijuana regulation in Colorado. “What you will hear from many in industry is that this works. Well, I’m not as optimistic about it working. If it worked, we would be able to present evidence of how the model works toward good enforcement….I’m not as optimistic that the theoretical model works as well as I think they hoped it would.”

The enforcement division has been beleaguered by budget problems since revenue from business applications did not come in as anticipated.

…a Florida company was paid $1.1 million to develop a seed-to-sale inventory tracking system, but the division was unable to come up with another $400,000 to put it in place. Auditors also noted that the division doesn’t review a dozen separate tracking forms it requires businesses to submit, including travel manifests showing when medical marijuana plants or products are transported.

…more than 40 percent of businesses who met a deadline to file license applications in the summer of 2010 have yet to be fully processed. Those businesses were grandfathered in — allowed to stay open even though the division has yet to license them.

And auditors questioned why some licenses were approved.

In 13 of 35 new business applications reviewed by auditors, evidence was found “of potentially disqualifying information.” Auditors flagged five files for concerns about past felony arrests, possible financial assistance coming from a “potentially unsuitable person” from out of state, and involvement in drug- or alcohol-treatment classes.

The audit also found:

• Seizures of marijuana from businesses that are not fully explained and “weak controls” over its destruction, including insufficient documentation and a storage facility that features weaker security features than those required of medical marijuana businesses.

• Questionable spending, including purchases for furniture, BlackBerry phones and a fleet of vehicles. The division racked up 19 straight months of net losses, including a loss of about $2.3 million in June 2011 because of large capital purchases.

• A failure to identify all medical marijuana businesses in the sales tax system, underreporting sales tax revenue generated by 56 dispensaries by about $760,000 in fiscal years 2011 and 2012.

Homeland Security Corporation (PINKSHEETS: HSCC) announced that it has submitted a comprehensive proposal to the Washington State Liquor Control Board (WSLCB). The categories encompass Product Knowledge, Quality standards and Testing, Usage and consumption, and Product regulation. The projected value could reach $2 Million over a 2 year period. The State of Washington is looking for consultants to help it develop a legal marijuana program as part of the statewide Initiative 502 that was passed by voters last fall. The mandate for the regulatory side of the program will fall under the control of the WA State Liquor Control Board (WSLCB). I-502 calls for the entire legal/regulatory system to be in place by December of 2013. HSC plans to use the legalization model it and a team of consultants developed in Colorado, refine it, expand it and adapt it to each state that plans to go through legalization process.

One of the company’s consultants, Gordon Fagras, attended the Washington marijuana legalization meeting held in Tacoma earlier last month. A news video is featured on KIRO 7 News in Seattle and can be viewed on the company’s main Website.

Dave Shade said, “HSC is working alongside an accomplished team of industry consultants, producers, laboratories, suppliers and even a marketing and consulting group. These are driven, intensely goal oriented individuals that take ‘think outside the box’ to a whole new level. We are able to draw upon a network of experts from many different fields beyond our normal scope, broadening the potential and reach of HSC. This integrated and expanded team effort will greatly benefit HSC and its shareholders not only for this initial proposal but for additional States passing this type of legislation.”

Homeland Security Corporation has contracted with Colorado how to track its marijuana, and is seeking a similar contract with Washington. The former CEO of HSC is the founder of private prison company Corrections Corporation of America, and the current HSC CEO is a contractor to CCA and is CEO of STOP, Satellite Tracking of People.

The MMJ industry in Colorado has taken huge steps in regulating medical marijuana from seed to sale in an effort to standardize procedures for its growth, packaging, transportation, distribution, waste disposal, and product testing. Basically every part of the seed to sale process.

This also includes security of the product as well as documentation of the complete process in which it is grown. This is accomplished through video surveillance, RFID, off-site monitoring of the surveillance cameras and systems, as well as complete traceability of the product back to its original plant and even mother if need be.

This is also accomplished by tracking of the product to patients distribution utilizing POS (point of sale) systems to track what a given patient buys what plant, strain, or even edible product they may use.”

Washington is on a spending spree, paying $292/hr for consultation on how much cannabis should be allowed to be grown, and how it should be tracked.

“Kleiman, a public policy professor at University of California, Los Angeles, leads the Massachusetts-based BOTEC Analysis Corp., which the state picked this month to help with the legalization process. The firm includes a former executive of the company that is the sole licensed supplier of medical marijuana in the Netherlands.

It also includes researchers with RAND Corp. who will help figure out how much marijuana state-licensed growers should produce.”